What Does Islamic Law Say?The Qur'an is very clear about the prohibition against usury-based business transactions (riba'):
"Those who devour usury cannot stand.... That is because they say, trade is only like usury; yet Allah has allowed trade and forbidden usury.... Allah does not bless usury, and He causes charitable deeds to prosper, and Allah does not love any ungrateful sinner. Oh you who believe! Be careful of your duty to Allah and relinquish what remains due from usury, if you are believers. If the debtor is in difficulty, grant him time until it is easy for him to repay. But if you remit it by way of charity, that is best for you if you only knew." Qur'an 2:275-280
"O you who believe! Do not devour usury, making it double and redouble, and be careful of (your duty to) Allah, that you may be successful." Qur'an 3:130
In addition, the Prophet Muhammad is said to have cursed the consumer of interest, the one who pays it to others, the witnesses to such a contract, and the one who records it in writing.
The Islamic judicial system is committed to fairness and equity among all parties. The fundamental belief is that interest-based transactions are inherently unfair, giving a guaranteed return to the lender without any guarantees for the borrower. The basic principle of Islamic banking is the sharing of risk, with shared responsibility for profit and loss.
What Are the Islamic Alternatives?Modern banks usually offer Islamic financing of two main types: murabahah (cost plus) or ijarah (leasing).
Murabahah: In this type of transaction, the bank purchases the property and then re-sells it to the buyer at a fixed profit. The property is registered in the buyer's name from the beginning, and the buyer makes installment payments to the bank. All costs are fixed at the time of the contract, with the agreement of both parties, so no late payment penalties are permitted. Banks usually ask for strict collateral or a high down payment in order to protect against default.
Ijarah: This type of transaction is similar to real estate leasing or rent-to-own contracts. The bank purchases the property and retains ownership, while the buyer makes installment payments. When payments are complete, the buyer gains 100% ownership of the property.